State Cannot Count Distributions from Special Needs Trust as Income

Reversing a lower court, the U.S. Court of Appeals for the First Circuit rules that a state housing authority cannot count distributions from a special needs trust funded by a settlement as income because the payments would not be considered income had the settlement been taken as a lump sum. DeCambre v. Brookline Housing Authority (1st Cir., Nos. 15-1458, 15-1515, June 14, 2016).

Kimberly DeCambre is the beneficiary of a court-established first-party special needs trust that was funded with the proceeds from a $330,000 personal injury settlement. Ms. DeCambre received a Section 8 housing voucher. In fall 2013, the Brookline Housing Authority (BHA), the local agency that administers Ms. DeCambre’s housing voucher, informed her that she was no longer eligible for Section 8 because the trust had disbursed more than $60,000 during the year for her car, phone, Internet, veterinary care for her pets and travel expenses. A hearing officer upheld the BHA’s decision.

Ms. DeCambre filed suit against the BHA in state court and her claims were removed to federal court. Ms. DeCambre claimed that the BHA violated her civil rights by counting the payments from the trust as income, arguing that it was improper to treat the distributions from the trust as income when, according to Department of Housing and Urban Development (HUD) rules, the same payments would not be considered income had she simply taken the settlement as a lump sum outside of a trust. The district court ruled in favor of the BHA, finding there was no regulatory support for Ms. DeCambre’s argument that her trust expenditures must be excluded from her income, and Ms. DeCambre appealed.

The U.S. Court of Appeals for the First Circuit reverses, holding that the “BHA improperly counted the distributions from the principal of [Ms.] DeCambre’s settlement-funded irrevocable trust toward her annual income.” According to the court, “we can discern no reason to exclude from annual income (as the regulations clearly do) lump-sum personal injury settlement proceeds paid directly to a tenant, . . . yet not exclude those same proceeds merely because they ‘[g]o to, or on behalf of’ a tenant, . . . , through a trust of which the tenant is the beneficiary.”